Streaming television has resulted in a number of disruptions to the media landscape, and there's more fallout to come. The success of Disney+ has media companies scrambling to offer their own services, flooding the streaming market. This is on top of Netflix (NFLX 5.03%) and Hulu, which is majority owned by Disney (DIS 3.69%). Both of those have been around for years.
Where there seems to have been less disruption is in the sports landscape. There are major sports league contracts with media giants like ESPN, ABC, Fox, and others, but the regional sports scene is still dominated by smaller networks. And these small networks are finding themselves squeezed by a new media landscape that could hurt smaller media stocks.
The old world
It's worth looking back at how sports league licensing deals worked under the cable network model and how they're working with streaming. Here are the steps.
- League/team sells rights to a network. Leagues and teams have agreements with TV networks to carry their games. Some of these are national deals with leagues, but others are regional agreements with what's known as regional sports networks (RSNs). After buying the Fox Sports Networks, Sinclair Broadcast Group (SBGI 5.48%) is one of the largest of these RSNs. RSNs often agree to multiple regional deals to become the "go-to" spot for local or regional sports.
- Network negotiates fees with cable companies. Cable companies pay networks fees to be on their cable network. ESPN has long been the powerhouse of this fee structure, but as sports have become more important to cable subscribers, RSNs have been extracting higher fees as well.
- Customers are charged for cable packages. Cable companies aggregate dozens of channels together in order to offer packages that will be attractive to a wide swath of users.
Under this scenario, there was rarely a breakdown between leagues and networks, who negotiated long-term, highest-bidder deals on a regular basis. Customers also had little say because packages are effectively take it or leave it, particularly in markets where there was only one cable company.
When a breakdown occurred, it was often at step No. 2, between networks and cable companies. When a network demanded fees that were more than the cable company wanted to pay, a blackout of channels might occur. Sometimes these impasses would last for weeks or months. But pressure from customers would mount on cable companies, who often agreed to higher and higher fees over time and simply passed those fees on to customers.
The incentive of the cable company was to keep customers from leaving their service, and there was a time-sensitive nature to keeping them happy, especially as a sports league season was going on. The problem for all parties today is that the incentive isn't as strong as it once was.
Streaming is breaking sports television
The steps are similar today in streaming TV deals, but the players are different. Today, we're seeing an impasse between Sinclair and YouTube TV, Hulu + Live TV, fuboTV (FUBO 3.15%), and Sling TV as the incentives are changing. And Sinclair's RSNs have been off the air for most customers for nearly four months now with no end in sight.
As a business, Alphabet doesn't have a strong incentive to pay higher fees to Sinclair for RSNs, even if it loses some customers. YouTube TV is a tiny portion of Alphabet's (GOOG 5.20%)(GOOGL 5.11%) business, and if it fails Alphabet won't really feel it. The same can be said for Disney, which owns a controlling interest in Hulu. There's just not much incentive to pay higher fees to RSNs and squeeze margins for streaming TV services when these aren't core products in the business.
Sling TV, which is owned by Dish Network (DISH 11.60%), and fuboTV are in a different situation and have more incentive to get agreements with RSNs done, but they're probably eyeing what their larger rivals are doing before overpaying for RSNs.
This leaves Sinclair in the middle, with partners that have little incentive to budge. Sports leagues are getting paid from Sinclair whether they distribute content to cable and streaming networks or not. And tech and media giants that control streaming services have little incentive to bend over backward to get a deal done because streaming is a small part of their business.
The path forward may not look anything like what we have today, and for Sinclair the reality is already setting in with a $4.2 billion writedown of local sports assets in the third quarter of 2020.
What's the future of sports on TV?
What we've seen with streaming is content companies cutting out the cable middleman and going directly to customers. And they've been incredibly successful in doing so.
We could see sports leagues do the same thing. The NBA has proven there is interest in a direct membership with its League Pass product. But League Pass is an out-of-market product, blacking out local games, and it's still a partnership with the Turner Broadcasting System, which is owned by AT&T (T 1.84%).
Could we see sports leagues take this direct-to-the-customer model with their content? Or strike add-on deals with streaming services like Disney+ or Netflix?
What's becoming clearer is that the middlemen are losing their power, even in regional sports. That's not a good sign for Sinclair or even ESPN, the former powerhouse in sports. Direct-to-consumer looks like the future, and sports is heading in that direction, too.